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Will US Homeowners Manage To Avoid Falling Off A Mortgage Forbearance Cliff?

US Homeowners And Mortgage Forbearance Cliff

When Congress first passed the CARES Act earlier this year to ameliorate COVID-19’s economic havoc, U.S. homeowners with mortgages on their properties were among the groups singled out for special protection. Perhaps aiming to avoid a replay of the 2008 foreclosure crisis, the law required lenders to offer homeowners with mortgages backed by government-sponsored entities like Fannie Mae or Freddie Mac six months of fee-free forbearance on loan payments. Some could even apply for a second six months of forbearance.

As that first six-month window is beginning to draw to a close, it looks like many of the roughly four million Americans who have already asked for forbearance will be seeking an extension. Sanjiv Das, CEO of Caliber Home Loans, wrote on MarketWatch that 42 percent of those who entered a forbearance plan in April have requested more time. Only 10 percent have exited forbearance in favor of a payment deferral or loan modification plan.

Those sorts of numbers are making banks nervous in their interactions with mortgage borrowers. Underwriters want to know which borrowers are good risks, but the pandemic makes that harder to suss out because the law requires lenders to report many home loans in forbearance as “current."

So, some banks have begun asking would-be borrowers upfront if they plan to seek forbearance due to the current economic crisis, The Wall Street Journal recently reported.

The Journal said the question generally appears in a form marked “COVID-19 borrower certifications.” The form aims to confirm that borrowers aren’t anticipating changes to their incomes that would jeopardize paying their mortgage bills.

Some warn of penalties if borrowers’ certifications later prove false. In some cases, the certifications also inform them that skipping payments won’t be an option until the U.S. government backs their loan (which can sometimes take months).

"You can’t control what customers do after you close," Esther Phillips, senior vice president of sales at Key Mortgage Services, told the Journal. So, banks are looking to inject a bit of control over forbearance requests at the outset.

Many U.S. mortgage borrowers’ financial positions certainly continue to look tenuous. For instance, the Mortgage Bankers Association recently reported that home loan delinquencies hit an alarming rate in Q2.

According to the MBA, 8.22 percent of all mortgages on one- to four-unit residential properties were delinquent during the quarter, up 0.39 percentage points from the first quarter and 0.37 percentage points from the same time in 2019.

Marina Walsh, MBA's vice president of industry analysis, said it "could not be more apparent" what an effect the pandemic had on the ability of many to pay their loans on time.

The MBA’s findings were far from a one-off slice of negative news. The Washington Post recently quoted figures from mortgage data company Black Knight as showing that serious mortgage delinquencies (those 90 days or more behind) have reached a 10-year high.

Black Knight said home loans at least 90 days behind grew by 376,000 in July, a 20 percent increase from June. The firm said that pushed serious delinquencies 1.8 million higher than pre-pandemic levels, as well the highest level seen since 2010.

“The good news is that overall delinquencies are trending downward,” Andy Walden, Black Knight’s economist and director of market research, told the Post. “In fact, the number of newly delinquent homeowners has fallen far below pre-pandemic levels. However, while this indicates that the inflow of new COVID-19-related delinquencies has subsided, the number of homeowners who have missed three or more payments is now at a 10-year high.”

The “good” news – sort of – is that mortgage forbearance seems to be falling. Black Knight found that roughly 3.8 million Americans are in mortgage forbearance more recently, down by roughly one million from May’s peak, according to CNN.

But how will those millions of borrowers still in forbearance get out – and what happens if their forbearance period comes to an end before their financial hardships do? The answers to those questions are still being written – in real time – on the ground.

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